by Karen Telleen-Lawton, Noozhawk Columnist (read the original in Noozhawk by clicking here)
The stock market is sort of like a hospital. To the lay person, they are both arcane institutions full of professionals who seem to know way more than you.
It may be difficult to avoid dealing with hospitals at some point in your life. You could totally avoid the stock market, but you probably shouldn’t. The important question becomes, how much should you invest in the market?
You can be comfortable investing surplus funds if you:
» Are covering your monthly expenses including budgeting for annual or semi-annual costs such as insurance;
» Have set aside 3-9 months-worth of fixed expenses for emergency purposes (three months for stable, salaried employment or retirement income; nine months for self-employed, especially your own physical labor)
» Have budgeted enough extra to cover potential major purchases over the next business cycle (house purchase, tuition, wedding, and so forth).
What you should invest in likewise depends on your comfort level. Invest in what you understand.
Unless it will be your full-time occupation, the bulk of your equity funds should be in mutual funds or exchange traded funds tracking some index of the market.
You may choose to keep track of and invest in a small number of individual stocks. For diversification purposes, I tend to advise clients to invest less than 5 percent of their portfolio in individual stocks.
Employee stocks are particularly problematic, since you’re further concentrating risk.
If you want as little involvement as possible, hire a professional team. That doesn’t relieve you from the obligation of understanding what they are and aren’t doing for you. Trust, but verify.
The easiest question is when to invest. Rather than trying to time the market, invest a regular amount every paycheck during both bear and bull markets. Consider this quote from Financial Advisor magazine November 2018:
“ … 18 out of the 25 strategists tracked by Bloomberg predict the S&P 500 will end 2018 above the record high of 2,930.75 reached in September.”
In fact, the S&P ended the year barely over 2,500. Over the long term, timing the market doesn’t work. Moreover, when you invest the same amount every paycheck, your dollars buy more in bear markets (when prices are low) and less when the market is high, so on average you will buy low.
With online trading, you can invest without ever meeting a stock broker. There are passive instruments like index exchange traded funds with very low investment fees, such as through Schwab, Vanguard, and Fidelity.
You can tailor your investments to your preferences by researching online on sites such as the Forum for Sustainable and Responsible Investing, or by using filters that are important to you.
If all these terms intrigue but baffle you, enlist the help of professionals and ask lots of questions. Then decide if you have the time and temperament to do it on your own.
Why should you be in the market at all? It is a legitimate question for risk-averse investors. One alternative is sticking your savings under the mattress (or equivalent). This pretty much invites the next natural or man-made disaster and is not recommended even for a short time period of time.
Another alternative is sticking to bonds and “cash equivalents” such as Certificates of Deposit. These are appropriate and necessary for a portion of our portfolio. But inflation’s toll makes these instruments too risky for your entire portfolio over the long run.
Average inflation over the last century has been about 3.2 percent per year; thus $1,000 saved when you are 40 might be worth about $300 when you are 80. The stock market, while volatile, has returned about 7 percent annually on average over the long term.
Again, it’s like caring for your health. Your future is at risk, so it’s good to get professional advice. But your future is at risk, so stay involved.
Karen Telleen-Lawton, Noozhawk Columnist
Karen Telleen-Lawton is an eco-writer, sharing information and insights about economics and ecology, finances and the environment. Having recently retired from financial planning and advising, she spends more time exploring the outdoors — and reading and writing about it. The opinions expressed are her own.